Question

At the end of 2016, Lucretia McEvil Company has \(180,000 of cumulative temporary differences that will result in reporting the following future taxable amounts. 2017 \) 60,000 2018 50,000 2019 40,000 2020 30,000 \(180,000Tax rates enacted as of the beginning of 2015 are: 2015 and 2016 40% 2017 and 2018 30% 2019 and later 25% McEvil’s taxable income for 2016 is \)320,000. Taxable income is expected in all future years. Instructions (a) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there were no deferred taxes at the end of 2015. (b) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there was a balance of $22,000 in a Deferred Tax Liability account at the end of 2015.

Short answer

A deferred income tax represents the amount that arises due to the difference between the income tax expense due to the organization's accounting techniques and theincome tax laws.

Step-by-step solution

Computation of deferred tax liability

Year	Taxable amounts	Tax Rate	Deferred tax liability
2017	$60,000	30%	$18,000
2018	$50,000	30%	$15,000
2019	$40,000	25%	$10,000
2020	$30,000	25%	$7,500
Total	$180,000		$50,500

(a) Journal entry

Date	Particulars	Debit	Credit
2016	Income tax expense	$178,500
	Income tax payable $\left(\$320,000\times 40\%\right)$		$128,000
	Deferred tax liability		$50,500
	(To record the income tax expense)

(b) Journal entry

Date	Particulars	Debit	Credit
2015	Income tax expense	$156,500
	Income tax payable $\left(\$320,000\times 40\%\right)$		$128,000
	Deferred tax liability $\left(\$50,500-\$22,000\right)$		$28,500
	(To record the income tax expense)